Before the financial year comes to an end, the tax saving investment proofs are asked by the HR of the companies.
We all get worried with few questions, generally in 3rd quarter of the year, as soon as we get the reminder from the HR to submit the tax saving investment proofs. Have I utilized the tax saving provisions effectively? Do I have to face a huge tax deduction from March salary?
It won’t be a big deal if you have already taken sufficient provisions and investments, but in case if you have not, it’s the right time to take a fast move.
There are certain tax on investments that can be enjoyed in the safety net of section 80C and other sections of Income Tax Act. Broadly, there are three ways to ensure that you are paying your taxes optimally; claim of tax free income, tax benefits against accidental actions and then finally and most importantly saving/ investing for tax benefits.
The experts from Mudra Home sort out the best options here. Gaurav Gaur says that the tax savings should be a major part of overall investment plans. This enables the tax payers to choose the right option and follow the disciplined investment process instead of investing in an unsystematic way at the year end, as is usually the case is. Let’s explore the tax saving options in detail:
Claiming Tax Free Income
Here the best you need to do is to submit your tax saving documents to the HR and relax. Your tax outflow will automatically get managed and is applicable for salary components that are tax free in nature. The list of items follows:
- In case you live on rent and want to make your HRA tax free: ask the owner to give you the receipt for the 12 month’s rental.
- Submit the medical bills to make medical allowance tax free for the year
- Submit the travel proofs to make leave travel allowance (LTA) tax free
- For conveyance allowance to be made tax free – you don’t need to do anything to prove. Attending work is good enough I guess!
Incidental Actions That Bring Tax Benefits
These are the benefits that you get for certain positive actions you take in your financial life. Here again you need to submit your tax saving proofs to claim tax benefits for those actions.
- Interest payment towards your home loan falls under section 24
- Principal re-payment towards your home loan falls under section 80C tax rebate
- Premium receipts towards Insurance paid for the year qualifies for section 80C tax rebate
- Tuition fee receipt of the education of your children qualifies under section 80C tax rebate
- Your contribution towards employee provident fund (EPF – as the HR already has the records, so no proofs needed to be submitted) – this allows for tax rebate under section 80C
- Medi-claim premium receipts allows a tax rebate under section 80D
- Medi-claim premium receipts of your parents also allows you to avail a tax rebate under section 80D
- Education loan statement (mentioning the interest component) falls under a tax rebate under section 80E
You must be wondering why Insurance is counted in incidental category?
This is because insurance is supposed to be seen in that manner. Buying insurance policies as a tax saving tool is discouraged and same implies with Medi-claim.
Investing/Saving for Tax Benefits
This is the time when you need to plan and act to manage your tax outgo. Basically, here you have to deal with the provisions of Sec 80C/Sec 80 CCC, 80G and 80 CCG. Initially you are expected to invest in any of the following products listed in these sections and in return you are benefitted by paying lesser tax. But there is a maximum limit to this; the collective limit for both section 80C and section 80CCC is Rs 1,00,000.
Section 80C/ 80CCC:
However, the total amount claimed under 80C (as listed above) as incidental category totals to Rs 1,00,000, so you just chill and relax. You are not left with much to do under these sections. But yes, if the total of your claims is less than Rs 1,00,000 then you have to make some investments to claim tax benefits.
The products that qualify for the same are as follows:
- Public provident fund
- Bank fixed deposits (the 5 yr thing)
- Mutual fund-ELSS
- National Savings Certificate (NSC)
- Pension Plan
After going through so many things, your next question will be which product to choose. Here is the recommendation from the experts of Mudra Home:
After a close observation about the products you will notice that all of them are long-term in nature. Because the products are long-term investments, you need to consider the negative impacts of inflation while deciding the product for you.
Inflation robs the value of money with time. What a Rs 500 note can buy today will not buy after 5 years. Probably you need to carry a Rs 1000 note! Therefore, whenever you make investments that are long-term in nature, calculate the returns that you earn should beat inflation.
It is important to understand that only growth assets have the power to beat inflation in the long run. Assets such as equities, equity mutual funds, gold and real estate have the power to beat the inflation. Though you may find them riskier by nature but in the long run it delivers the best value. An income asset such as fixed deposits, bonds and traditional investment such as insurance policies etc gives returns less than inflation.
The following section 80C products are arranged as per the asset class:
- Public provident fund
• Bank fixed deposits (the 5 yr thing)
• National Savings Certificate (NSC)
• Pension Plan
• Mutual fund-ELSS
Nowadays, it has become a trend that young and middle aged people look at growth assets only. Mutual funds/ ELSS conquest over ULIPs since it has far lower costs and charges loaded onto it. This makes it one of the best tax saving instruments which is available in the market.
What is ELSS?
An equity linked with savings scheme (ELSS) is quite similar to a diversified fund – it invests broadly in Indian equity market. It has no declared preference for sectors or themes. It also chooses stocks based on the fund manager’s research and hypotheses. An ELSS has atleast three-year lock-in period.
Here’s how to choose (the rule of three):
- Do not choose funds that have less than three years of track record.
- Do not choose funds that have an asset base of less than Rs.300 crores. This figure is available in the fund fact-sheet (available for download at the fund’s site).
- Rank all ELSS in decreasing order as per the last three-year returns. Choose one out of the top three. Be aware, past performance may not be repeated in future.
In case you have made any donation to any recognized charity or relief fund, a part of the donation can be claimed as a tax rebate. You have to submit the donation certificate to HR.
A few organizations such as the Prime Minister’s Disaster Fund benefit you with 100% deduction. However, mostly other donations including several religious organizations allow only a 50% deduction. If you pay Rs. 1,000 to such an organization, you can claim Rs. 500 as a tax rebate.
This is a newly announced rebate announced by the government called Rajiv Gandhi Equity Savings Scheme (RGESS). Its features are
- a maximum amount of Rs 50,000 can be invested
- 50% of Tax rebate
- The individuals whose annual income is less than 10 lakhs can invest in this
- First time investors in stocks
- Investing in BSE 100, CNX 100, PSUs, certain mutual funds and ETFs (list)
- Initially lock in of 3 year but can trade after 1 year
There is not too much of clarity in term of execution and procedure in this scheme. You may can give it a miss this year or wait for another few weeks to get complete clarity.
Following is the complete check list of documents you need to submit to your HR
- 12 months rental receipt from owner: In case you live in a rented apartment
- Statement of housing loan with details of principal and Interest components: In case you have home loan
- Medical bills for that particular financial year if any
- Tuition fee receipt paid towards your children (if any)
- Flight & train tickets for LTA claims
- Receipts of Insurance premium paid for that particular financial year
- Any NSC purchased in that financial year
- Statement of Mutual fund (ELSS)
- Receipt of Medi-claim premium
- Receipt of Parents’ Medi-claim premium
- Statement of Education loan (mentioning the interest component)
- Receipts of Bank Fixed deposit (the 5 year lock-in thing)
Be aware with the current collection of tax free bonds. Firstly they have nothing to do with tax rebate of Sec 80 CCF. Section 80 CCF (Rs 20,000) has been eliminated this year and you will not get any tax rebate on infrastructure bonds like the one you got in previous years. Hence do not fall for this trap.